Opinion: UN foray into tax policy will benefit emerging economies

OECD has traditionally been the standard bearer for tax policy — with rules set for decades by high-income economies. But the United Nations’ recent resolution on tax cooperation opens the door to forum shopping for countries worldwide and has the potential to benefit low- and middle-income countries. Late 2022, the U.N. General Assembly adopted an inclusive and effective tax cooperation resolution. In March, the U.N. closed their public consultation on the matter after receiving inputs from an array of stakeholders, and the secretary general will compose a report to be released this September. The U.N.’s foray into tax governance has triggered mixed reactions among global audiences. Some see this as a historic step toward a fairer international economic system, given the weight of the United States and the European Union at the Organisation for Economic Co-operation and Development. Nigeria initially submitted the resolution on behalf of the 54-member African group of states. Others are more circumspect. Dutch Secretary of Finance Marnix van Rij voiced opposition to the resolution, saying, “The government does not yet see any added value in creating a negotiating forum” alongside the OECD also focusing on international tax issues. A stronger U.N. presence raises the prospect of forum shopping, meaning countries may opt for tax governance through the U.N. or OECD. So how did we get here and what are the potential paths forward? The road to the two-pillar solution OECD, which historically operates under the thumb of the U.S. and EU, is responsible for the current international tax regime. Scholars have characterized the international consensus as a “mostly European gentlemen’s agreement” interested in protecting the taxing rights of capital exporting countries. The OECD Model Tax Convention is the dominant model in the global network of over 3,000 tax treaties. This was rarely questioned until the 2008 financial crisis, which brought international tax issues to the fore. An array of budget crises and corporate tax-dodging scandals paved the way for the OECD/G20 Base Erosion and Profit Shifting, or BEPS, project, an ambitious multilateral effort initiated in 2013 to combat corporate tax avoidance. With the U.N. injecting itself into the policy debate, OECD proposed a two-pillar solution (BEPS 2.0) to promote a fairer global tax system.This was endorsed in October 2021 by more than 130 countries who agreed to continue discussions on proposals to allocate more taxing rights to market jurisdictions (“Pillar One”) and to introduce a 15% minimum corporate tax (“Pillar Two”). Initially hailed as a “ground-breaking tax deal,” approval and implementation have proven cumbersome, and it looks increasingly unlikely that the OECD will deliver a global solution. Forum shopping in tax? The recent U.N. action therefore comes amid stagnation at OECD. Progress at the U.N. is at least partially attributable to weaker U.S. influence in the U.N. General Assembly relative to OECD — attempts by the U.S. to water down language in the U.N. resolution were rejected by low- and middle-income countries. The resolution improves the stature of the U.N. in global tax policymaking, raising questions about how the U.N. and OECD can coexist. We identify three possible futures for U.N./OECD tax governance: cooperation, substitution, and competition. Cooperation First, the U.N. and OECD may cooperate, working together to develop global tax solutions. There is precedent — the two have cooperated on projects like Tax Inspectors Without Borders and the Platform for Collaboration on Tax. However, the enduring conflict between low-income countries who can set the agenda at the U.N., and the high-income economies that control the OECD, make such a solution unlikely, as recent research highlights. Substitution Second, the U.N. may seek to replace OECD as the primary global tax governor via substitution. The U.N. possesses several advantages that may enable it to displace OECD, including legitimacy and inclusivity bolstered by global membership and a long history of forging global solutions. OECD, meanwhile, is grappling with divisions among its limited membership. However, high-income countries, and especially the U.S. and EU, will likely resist such substitution given that the OECD better serves their interests. Competition The probable result, then, is coexistence and competition between the U.N. and OECD. The institutions will continue to forge overlapping solutions to global tax dilemmas. This allows states belonging to both institutions to forum-shop by selecting the tax rules that best serve their interests at a given point in time. Research suggests that countries might also threaten to abandon one forum in favor of another to generate leverage. Though common in other spaces, such as trade, forum shopping is new to international tax governance given OECD’s decadeslong monopoly. When states shop for the best possible deal in this way, it reduces the power held by global bodies, and the states that control them, since they become less able to enforce their preferred solutions. Low- and middle-income countries therefore appear likely to benefit from competition in the short-term – perhaps to the detriment of high-income countries and OECD.